Turning a spare room into an income source

Renting a Spare Bedroom

by Gary Foreman

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My wife and I are considering renting out a spare bedroom. We could use the extra income and the bedroom is just sitting there empty. Can you give us any advice on the pluses and minuses of renting a spare bedroom? And, if we do rent it out, what can we do to make it work for everyone.Seth

You're right. Renting a spare bedroom can be a great way of taking an unused asset and turning it into extra income. But, renting a spare bedroom doesn't come without risk. There's a right way and a wrong way to do it. Let's work on some guidelines to decide whether it's a good idea and some tools to make it successful if you do decide to rent out a room.

Begin with a little self-examination. Are you very private people? Or do you enjoy having other people around? You may be the type who value privacy so much that having a renter isn't realistic.

You'll also need to be honest about how important the money is to you. If the income from renting a spare bedroom is necessary to help you pay your mortgage, you'll need to be willing to put up with some inconvenience. On the other hand, if it's just a little extra income, then you'll be less willing to change your lifestyle to accommodate a tenant.

Estimate how much income renting will generate. In additional to extra income, you'll also have increased expenses, especially utilities.

As far as the IRS is concerned, the rent you receive is taxable income. You will be able to deduct expenses, but there's a good chance that you'll owe some taxes.

Finally, decide if you have what it takes to be a landlord. Find out what the law is in your state regarding removing a renter from rental property. In many states, it's very hard to do. That can be very frustrating, especially if they're living in your home.

Will you be able to stand firm if your renter isn't living up to their side of the agreement? If not, renting a room might not be a good idea.

If you decide to go forward, you'll want to use these tools to increase the odds of success.

Begin with the renter. Decide whether your new roommate will be more of a renter or a family member. Your decision will have a major impact on how you proceed.

For instance, you might want to limit a renter to their bedroom and a bath, but a friend could have access to the entire house.

Try to find a renter whose lifestyle is similar to your lifestyle. If you're a quiet person, renting to a partier is likely to become a problem. Messy people shouldn't rent to those that love neatness.

Choose your renter carefully. A background check might seem silly, but it's essential with strangers. Even with long-time friends, you'd be surprised at what you don't know about them.

Work out schedules for any common areas. For instance, if you're allowing access to your washer and dryer, make sure that you don't both want to use it at the same time. The same is true with the kitchen.

Anticipate household trouble spots. Bathrooms and kitchens are potential problems. No one likes to clean up someone else's mess.

Clearly define any house rules in advance. Is your renter allowed to entertain guests? If so, is it allowed just in their room or in the common areas as well? Are overnight guests allowed? If so, how many nights are they allowed?

Next, you'll want to have a written lease, and don't kid yourself that you won't need one if you rent to a friend. A written document is even more important with a friend.

Make your written agreement specific. It should specify not only the monthly rent, but also when it's due and what happens if it's not paid on time. Specify if your renter is responsible for any household chores. Make sure you include a security deposit.

Work out in advance what happens if the rent is late. Will your roommate need to give you advance notice if they intend to move out.

Working out lease issues before someone moves in is important. You can coolly set up parameters, responsibilities, and consequences if they become necessary. Working out troubles after they occur will be much harder.

Allow for a trial period of two or three months. At the end of that time, either side should be able to walk away without any hard feelings. If you decide to continue, have an ending date in the lease that will require both sides to agree to extend.

Renting a room isn't an always an easy way to earn extra income, but if you have the right temperament and find the right tenant, renting out a spare bedroom can be a wonderful way to help balance your family's books.

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.

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